I am the founder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before I started CircleUp, I worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital. My experience in private equity exposed me to many great consumer and retail businesses that were too small to obtain funding through the traditional private equity channels. I created CircleUp to open up these investment opportunities to more investors, helping the best of these businesses gain access to capital while lowering the cost of investment for individual and small institutional investors. I received my MBA from Stanford and BA from Duke. I also hold Series 24, 63, and 82 licenses. You can connect with me through http://www.facebook.com/CircleUp.

The Best Business Model

When I heard in November that Toms co-founder Blake Mycoskie had launched The Marketplace, where consumers can buy from social entrepreneurs, I was reminded, once again, why I love marketplaces.

Mycoskie’s expansion of Toms’ One for One™ philosophy to create a larger socially-infused marketplace illustrates many of the compelling attributes of marketplaces that I love: their power to disrupt inefficient and fragmented markets; an ability to add potential value for both buyers and sellers; and their capacity to actually expand a market. As Greylock Partners’ Simon Rothman says, “Markeplaces are devouring industries, I think they are aggressively tearing apart industries.”

This is occurring in retail marketplaces such as Abesmarket.com and Rakuten, and in what Andreessen Horowitz’s Jeff Jordan calls “people marketplaces” (marketplaces that provision services from mechanics to drivers to grocery delivery). It’s also occurring in equity crowdfunding platforms such as CircleUp, which is providing a way for investors to find and invest in a select group of private consumer and retail companies.

Perhaps what I love most about marketplaces is that they tend to become more dominant as they get larger. They epitomize the power of the network effect. Many businesses reach a point where continued growth becomes a disadvantage. Nowhere is this more evident than in U.S. banking, where recent history and research going back 20 years has shown the largest banks do not enjoy economies of scale. More participants on both sides of the equation may make marketplaces more potent. Examples abound: more classes and more students on massive open online courses (MOOCs), more buyers and sellers on eBay and MercadoLibre, more drivers and riders on Uber, Lyft or Sidecar. The network effect is powerful.

The network effect also means that marketplaces, when done right, tend to be high margin businesses as fixed costs can be shared over a larger and larger customer base. OpenTable grew from 14.5 million seated diners in early 2010 to nearly 33 million at the end of 2012, and installed-restaurants more than doubled in the same timeframe. Meanwhile, operating margin expanded from 37% in 2010 to 47% in 2012 (excluding stock-based compensation expense, acquisition-related expenses and amortization of acquired intangibles).

There is another aspect of marketplaces that is sometimes overlooked—their ability to expand the market opportunity by spawning new price points or enhancing convenience.

“Great marketplaces do not simply aggregate a market; they enhance it. They leverage the connective tissue to offer the consumer a user experience that simply was not possible before the arrival of this new intermediary,” Bill Gurley, General Partner at Benchmark Capital, says.

Think about that for a second. People often make the mistake of assuming that the value a marketplace adds is simply in making the process more efficient. Gurley is pointing out that a marketplace does more—-it helps create value and enhance the market.

Look at Airbnb. A recent study on its economic impact on New York City found that Airbnb visitors stay on average 6.4 nights, compared to 3.9 for hotel guests. In a similar study for Amsterdam, 35% of Airbnb guests said they would not have visited Amsterdam or stayed as long without Airbnb, and 75% said Airbnb made them more likely to return. In short, people who would not otherwise be traveling are now visiting these cities because of Airbnb. Airbnb is actually expanding the total available market by creating a convenient alternative for affordable travel.

Marketplaces can also create an improved experience. As Hiroshi Mikitani, founder and CEO of the world’s third-largest online marketplace Rakuten, says, “I didn’t want to create a superstore; I wanted Rakuten to be more like a bazaar, where the owners of many small shops would curate the merchandise and interact personally with customers. I believe that is the kind of experience many people prefer—even if they’re shopping online.”

Abesmarket.com, a marketplace offering natural and organic products, is providing its own enhanced experience by sharing seller stories that have created a strong community of sellers and eco-friendly customers. Abesmarket.com was named a CircleUp25 as one of the most innovative consumer and retail brands changing the way we live our lives.

What’s not to love about the most successful marketplaces? In many instances,they provide efficiencies, improve the buying and selling experience, and add value.

As an entrepreneur you want to know that you’re having a positive impact on others. In the case of CircleUp, we are giving investors access to innovative start-ups that are screened through our due diligence, and we offer opportunities for investors to engage directly with the founders and managers of those start-ups on our platform. Of course, investors need to conduct their own due diligence and determine if the investment is appropriate for their own personal financial circumstance. While the minimum investments at many private equity firms often range from eight to ten figures, online marketplaces provide an alternative that enables companies to raise much smaller amounts, and allows the investors to invest far less than the typical minimum in a private transaction.

As they grow, marketplaces enhance their own value as scale becomes a barrier to entry. Once a marketplace has reached a critical mass of participants, it becomes the place for buyers to flock. Start-up competitors will find it difficult to break into the market. Why make restaurant reservations elsewhere, when you know OpenTable exists?

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